In this day and age where stories of mortgage foreclosures routinely top the nightly news, it is becoming increasingly difficult for former homeowners to find a place to live. Unfortunately for borrowers, once the right to possession of the homestead is lost after the foreclosure process has been completed, it typically takes years for the borrower to repair his or her credit to the point that would enable the borrower to once again obtain a loan for the purchase of a home. Even potential borrowers with relatively high credit scores and without a foreclosure reflected on their credit history are finding it difficult these days to obtain financing from lenders. So, where is a displaced homeowner supposed to live? Many people have found that even renting a home is not an option unless one has a credit-worthy co-signor. Enter the contract for deed.
Contracts for deed are becoming increasingly popular in this economic climate. Basically, a contract for deed is a method of seller financing that enables a buyer to obtain an ownership interest (called a “vendee’s interest”) without having to jump through all the hoops presented by an institutional lender. Sellers under contracts for deed are usually more forgiving with respect to credit histories than institutional lenders. Sellers, however, typically (but not always) offset this risk by requiring a higher down payment than in a traditional lending context. Pursuant to the terms of the contract for deed, the buyer then makes regularly-scheduled payments of principal and interest and then typically obtains a warranty deed transferring fee title to the property once all the payments have been made.
Although, generally speaking, sellers under contracts for deed tend to be less stringent with respect to credit-worthiness of buyers, potential buyers should be aware that the process for cancelling the contract (and, thus, obtaining possession of the property) is much more expedited than in the mortgage context. Under Minnesota law, a mortgage foreclosure conducted by advertisement (i.e., outside of the judicial system) typically takes approximately nine months from start to finish. Foreclosures by action (i.e., foreclosure conducted under judicial supervision) tend to take even longer. However, once the appropriate notice is given to a buyer who is in default of the payment terms under the contract for deed, cancellations can occur in as little as approximately sixty days if the default is not cured. After the contract is properly canceled, the buyer must then vacate the property, and typically all the payments made under the contract remain the property of the seller.
While contracts for deed do present a viable alternative to traditional financing, and while they are becoming more prevalent, it may still be relatively challenging to find sellers willing to offer this option. Once a willing seller is located, both sellers and buyers would be well-advised to seek legal counsel when negotiating and drafting the contract.